Karachi, January 04, 2023 (PPI-OT): Fertilizers: CY22E Urea sales to close up 4% YoY

As per provisional data, Urea sales in Dec-2022 are expected to clock in at 832k tons, up 39% YoY. Similarly, DAP offtake for Dec-2022 is expected to clock in at ~160k tons vs. 117k tons in SPLY depicting an increase of 37% YoY. Cumulative offtake during 4QCY22 for Urea is expected to increase by 9% YoY, while decline by 31% YoY for DAP.

While extended plant turnarounds by the bigger local players impacted Urea production during 4QCY22, imported Urea by government and offtake by smaller players were able to meet local demand.

After a gap of six months, Fertilizer manufacturers have recently increased Urea prices by Rs190/bag to pass on inflationary pressures. With steady margins, we maintain our Overweight stance on the Fertilizer sector as the sector’s cash rich position directs at sustainable payouts. Our top picks are FFC and EFERT, offering an average D/Y of almost 19%.

Dec-2022: Urea sales to increase with support of imports

As per latest provisional data, Urea sales in Dec-2022 are expected to clock in at 832k tons, up 39% YoY. While the bigger local players faced lower than sector average growth, smaller players and government imported Urea sale are expected to be outperformers this month.

For the quarter, Urea sales are expected to accumulate to 1.8mn tons, up 9% YoY. EFERT’s Base plant, remained offline for maintenance activity for the most part of the outgoing quarter which was the reason for the company’s lower offtake during 4QCY22. The plant resumed operations on November 27, 2022 and started contributing during Dec-2022. To recall, the company’s Enven plant with a capacity of ~1.3mn tons had also tripped during late November which was then restored by 6th Dec-2022. Moreover, FFC’s plant also remained shut for almost 3 to 4 weeks during 4QCY22.

Cumulative CY22 offtake totalled 6.61mn tons, a 4% increase compared to SPLY. With a Urea production assumption of ~350k tons for the month, urea’s closing inventory comes to around 65k tons for CY22.

Monthly DAP offtake expected to grow 37% YoY

DAP off-take for Dec-2022 is expected to clock in at ~160k tons depicting a 37% YoY increase. FFBL, sole manufacturer of the product, is expected to post offtake of 110k tons during Dec-2022. FFC and EFERT on the other hand, are expected to post DAP sales volume of 2k tons and 32k tons during the same period, respectively. Total DAP offtake for CY22 is expected to clock in at 1.21mn tons, a 36% YoY drop.

Additional price hikes for urea are possible

The sector’s production costs have been impacted as a result of the jump in inflation and rupee depreciation. In reaction, fertilizer producers have raised the cost of urea by Rs190/bag during the ongoing month taking retail price to ~Rs2,440/bag (Granular @ Rs2,585/bag). We do not rule out further increase in prices in case of a hike in gas prices. According to our view, an increase in gas prices is likely in the near future given that one has been long overdue and the recent IMF demand that gas pricing, like electricity costs, be similarly rationalised. We believe the industry would most likely pass through this increase to the farmer.

Consistent high dividend yields on offer

We continue to retain our Overweight stance on the Fertilizer sector as it is anticipated to report a steady revenue stream going forward whereas its cash rich position also directs at sustainable pay-outs for the future where FFC and EFERT offer a CY23 average D/Y of ~19%. In the medium term, we believe that opportunity cost resulting from dampened demand will restrain stock prices, however the long-term story for the sector remains intact.